Malaysia’s Return to International Market with US$1.3bn Sukuk in April 2021 Set to Boost ESG/Sustainability Issuances by Sovereigns

After an absence of over four years the Government of Malaysia (GOM) returned to the international Sukuk market on 22 April 2021 with yet another first – this time with a two-tranche US$1.3 billion Sustainability Sukuk, the first such sovereign issuance in the world.

Against the background of the global COVID-19 pandemic and its health and economic impact which has affected every country on earth, Sukuk has shown a dogged resilience in 2020 with volumes more or less matching those in 2019 and projected to increase in 2021. This is both as a public debt financing tool for governments and refinancing, working capital, business expansion and boosting Basle-related Tier 1 and 2 capital requirements for banks, and corporates.

The pandemic has also shifted to re-focusing attention on SDG, ESG, SRI, Sustainability and Ethical finance – all of which overlap with the faith-based intermediation principles of Islamic finance.

Malaysia, consistently the world’s largest Sukuk market in the last decade or so, according to the latest data from the Securities Commission Malaysia (SC), recorded a total RM223.94 billion (US$54.2 billion) Sukuk issuances (RM235.20 billion in 2019) by the Government and corporates at December 2020 – out of a total bonds and Sukuk issuances of RM366.67 billion (RM384.85 billion in 2019), or 61.07%.

This latest Malaysian sovereign Sukuk augurs well for the market following on from the UK’s £500 million second issuance, and in the ESG space from the Islamic Development Bank’s US$2.5 billion Sustainability Sukuk – both in March 2021.

The 2021 US$1.3 billion Reg S/Rule 144A Malaysian Government Sukuk Wakala offering comprised two tranches – a 10-year US$800 million tranche maturing on 28April 2031 and a 30-year US$500 million tranche maturing on 28 April 2051. Both were issued by Malaysia Wakala Sukuk Berhad, a Labuan-incorporated special purpose vehicle owned by the Ministry of Finance on behalf of the Obligor/Wakeel, GOM.

The Ministry of Finance (MoF) had mandated CIMB Investment Bank Berhad, HSBC and J.P. Morgan Securities plc in early April to act as joint Lead Managers and Bookrunners to the transaction, with the Islamic Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IsDB) Group, acting as Co-Manager.

They were tasked to arranged a series of virtual investor meetings in Asia, UK, Europe, the Middle East and with US Offshore Accounts.

The initial price guidance on the 10-year and 30-year was 150 basis points (bps) for the 10-year certificates and 165 bps for the 30-year certificates, respectively. This was tightened to price at 135 bps and 145 bps respectively, representing a flat to minimal new issue premium versus the current GOM sovereign yield curve.

The Sukuk was priced on 26 April with the 10-year US$800 million tranche bearing a periodic distribution of 2.07% per annum paid semi-annually against a benchmark UST1.125% due 2031 and a yield of 1.57%. The 30-year US$500 million tranche was priced at a periodic distribution of 3.075% per annum paid semi-annually against a benchmark UST1.625% due 2050 and a yield of 2.275%.

The demand for the certificates says the MoF was “overwhelming”, the first GOM international issuance since 2016. This latest offering was oversubscribed by 6.4 times. Due to the overwhelming demand the Government decided to upsize the
initial target size of US$1 billion to US$1.3 billion. This demand dynamic was partly boosted by the fact that both tranches were assigned an A3 rating by Moody’s Investors Service and A- by S&P Global Ratings.

Indeed, the joint offering, says London-based international law firm Linklaters, which acted for the GOM, “was the highest oversubscription rate ever achieved by GOM – a strong recognition of Malaysia’s capabilities in structuring innovative Sukuk in the Islamic finance industry.”

The investors, explained Tan Sri Mohd Irwan Serigar Bin Abdullah, Secretary General of Treasury of the MoF, “appreciate that notwithstanding the challenging external factors, Malaysia remains among the faster-growing economies in the region, and continues to successfully pursue fiscal consolidation while maintaining monetary and financial stability. This is a remarkable achievement as demonstrated by the tight pricing and excellent response on this landmark Sukuk”.

The allocation was well-spread globally, with 55% of the 10-year Sukuk distributed to investors in Asia, 33% to Europe, Middle-East and Africa (EMEA) and 12% to US Offshore Accounts. Some 46% of the 30-year Sukuk was distributed to investors in Asia, 33% to EMEA and 21% to US Offshore Accounts.

By investor type, the distribution of the 10-year tranche was 67% to fund managers and insurance companies, 18% to central banks and governments, 14% to banks and 1% to others investors, while for the 30-year tranche was 83% to fund managers, 10% to banks, 4% to central banks and governments, and 3% to other investors.

The strong demand, says the Ministry, has also resulted in the lowest ever yield and spread for a US-dollar Sukuk issuance by Malaysia, with the 10-year and 30-year Trust Certificates priced at 2.070% (T + 50 basis points) and 3.075% (T + 80 basis points), respectively. More importantly, this demonstrates the market’s confidence in Malaysia’s economic recovery and growth prospects, despite a challenging past year due to the COVID-19 pandemic.

Malaysian Finance Minister Tengku Zafrul Aziz could not overstate “investors’ vote of confidence in our maiden Sustainability Sukuk issuance, which also reflects their belief in Malaysia’s strong economic fundamentals and solid prospects for growth. The issuance is not only a global first on many fronts, but also a strong recognition of Malaysia’s Islamic finance industry’s innovative capabilities in structuring Sukuk to help advance Malaysia’s SDG-focused policies towards achieving our Shared Prosperity Vision 2030.”

As the Minister alluded to, this issuance is the world’s first US Dollar Sustainability Sukuk issued by a sovereign, whereby proceeds will be used for eligible social and green projects aligned to the United Nation’s Sustainable Development Goals (SDG) Agenda.

“This,” says Tengku Zafrul, “will enable Malaysia to not only meet its commitments as a responsible nation and signatory to the Paris Agreement, but also further its efforts to advance its people’s socio-economic well-being. It is also a testament to the Government’s efforts in combating climate change as well as accelerating the transition towards a more resilient and inclusive economy, in line with the Government’s Shared Prosperity Vision 2030.”

This US$1.3 billion global Sukuk offering was structured under the principle of Wakala. The underlying assets for the offering comprise 100% non-physical assets. The Sukuk structure, according to HSBC Amanah Malaysia and J.P. Morgan, the Joint SDG Structuring Agents, is unique as its underlying assets are sustainable assets, being vouchers representing entitlement to a specified number of travel units and Shariah compliant shares, representing travel entitlement on Malaysia’s Light Rail Transit (LRT), Mass Rapid Transit (MRT) and KL Monorail networks.

This unique combination of underlying assets, stresses the MoF, represents a major breakthrough in sovereign Sukuk, being the first time a sovereign has accessed the global Sukuk market without utilizing physical assets (such as land and buildings) or Commodity Murabaha. “This maiden innovative Sukuk structure not only paves the way for other sovereigns to follow suit but also sets a new benchmark and showcases Malaysia’s global leadership in Islamic finance, reinforcing the country’s position as the world’s largest Sukuk market,” stressed the MoF.

The GOM has developed the Government of Malaysia SDG Sukuk Framework under which it may issue green, social or sustainability Sukuk and use the proceeds to finance and/or refinance, in whole or in part, existing and/or future government loans or expenditures. HSBC Amanah Malaysia Berhad and J.P. Morgan Securities plc are the SDG and Sustainability Structuring Agents to the transaction..

Sustainalytics, a Morningstar Second Party Opinion, considers the US$1.3 billion Sustainability Sukuk and the Framework as being robust and transparent and aligned with the four core components of the Social Bond Principles 2020 (SBP), the Green Bond Principles 2018 (GBP), and the ASEAN Sustainability Bond Standards 2018 (ASEAN SUS). The projects funded by the sustainability bond/Sukuk proceeds are expected to facilitate the transition to a low-carbon economy and lead to positive social impacts in Malaysia.

Sustainalytics further believes that the GOM SDG Sukuk Framework is aligned with the overall sustainability strategy of the company and that the use of proceeds categories will contribute to the advancement of the UN Sustainable Development Goals 1 (End poverty in all its forms everywhere), 3 (Ensure healthy lives and promote well-being for all at all ages), 4 (Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all), 6 (Ensure availability and sustainable management of water and sanitation for all), 7 (Ensure access to affordable, reliable, sustainable and modern energy for all), 8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all), 9 (Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation), 11(Make cities and human settlements inclusive, safe, resilient and sustainable), and 15 (Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss).

Additionally, Sustainalytics opines that GoM has adequate measures to identify, manage and mitigate environmental and social risks commonly associated with the eligible projects funded by the use of proceeds.

Malaysia is the pioneer of global sovereign Sukuk issuance. In June 2002 Malaysia issued the world’s first such Sukuk – a 5-Year US$600 million issuance which was priced at a semi-annual floating rate of return equal to 6-Month LIBOR plus 95 basis points. Since then, the GOM issued global in 2010, 2011, 2016 and now in 2021. The GOM’s previous global Sukuk prior was a two tranche US$1.5 billion Sukuk Wakala in April 2016 comprising a 10-Year US$1 billion tranche priced at a profit rate of 3.179% per annum and a 30-Year US$500 million tranche priced at a profit rate of 4.08% per annum.

The net proceeds of the Series 1 Certificates will be used by GOM for “Shariah compliant general purposes, including but not limited, to financing or refinancing, in whole or in part, new or existing development expenditure with a social and/or green focus, in accordance with the eligibility criteria described under the SDG Sukuk Framework of the Government of Malaysia.”

The net proceeds of the Series 2 Certificates similarly will be used for Shariah compliant general purposes, including but not limited to refinancing prior development expenditure and “to finance new development expenditure in
2021, as governed by External Loans Act 1963 [Act 403] and Development Fund Act 1966 [Act 406].” Individual projects have yet to be assigned by GOM.

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